Need 25pc investment-to-GDP ratio to provide buoyancy to the economy
The farming community is not doing much better either. There, too, the same issue of competitiveness continues to dog us. In these last few years, both agricultural competitiveness and productivity have decreased
Election campaign season has effectively started, yet all anybody – especially mainstream media – can talk about is the Panama case. Of course the legitimacy of the man in charge matters, but in the modern age, in the nation-state sense, it’s always the economy, stupid.
And no matter how ably, or otherwise, the Sharif team is leading the nation, if the lot of the average Joe on the street does not improve, economically, he will just vote them out of office; or so goes street dictum. So became the lot, at least, of the PPP when the people went for the vote in ’13.
And now, with election campaigning effectively underway, how much will the economy really matter? To understand the situation, DNA talked exclusively to eminent economist, Dr Salman Shah.
Question: The finance minister seemed happy enough with the economy going into the election campaign. Do you share his optimism?
Salman Shah: The economy has many dimensions, of course, and the finance minister usually sees things from his own particular angle. In my opinion, the economy’s major issues – what needed improved – have not improved much in the present electoral cycle.
Take exports, for example. Despite tall promises on the last campaign trail, the government has not been able to improve our export competitiveness in any way. Not just exports, but export expectations have also decreased. This situation has not changed in years.
The farming community is not doing much better either. There, too, the same issue of competitiveness continues to dog us. In these last few years, both agricultural competitiveness and productivity have decreased.
Investment is another area where the government has failed. At 15pc, our investment to GDP ratio is very low. It should at least be around the 25pc mark to provide buoyancy to the economy. At the moment, private sector investment is badly crowded out. And with the deficit rising again, the government is borrowing from the banks, which again leaves little for the private sector to borrow from.
We face a major crisis of investment climate. The IMF has highlighted these issues many times and mandated reforms. Yet very little, if any, progress has so far been made.
This government considers projects like the Orange Line and power plants as economic development. Yet they do not increase productivity. They do not draw in any investment and they do not address the issue of our chronic lack competitiveness.
Q: About the deficit; how much will it push the government to borrow and how much will that hurt the private sector? Also, how heavily is the deficit likely to hang over the next election?
SS: If you see now, commercial banks are lending almost exclusively to the government. Of course, as you asked earlier, that has a direct bearing on private sector lending. When the government takes the lion’s share of banks’ lending money, there’s nothing left for the private sector.
There’s one more, very important, thing to consider. For example, the average voter does not really understand the investment climate. He does not really understand why our exports are suffering. He sees the coal bonanza, but he does not know how that affects the air he’s breathing, the health problems he’s likely to encounter down the line, etc. In short, the voter does not have perfect information. Far from it. If you see now, most investment is government investment, it’s not private sector investment. That is not good economics.
Q: Is it wise, in the present climate, to put all our eggs in the CPEC basket?
SS: Why do we not understand that CPEC involves time lags that run into years and decades? The benefits of CPEC, quantifiably, will make themselves apparent 10-15 years down the line. Of course there’s a psychological barrier, and that counts for a lot in the present day market dynamic, but in real terms the multiplier effect of CPEC will come into play many years from now. A lot depends on how well we integrate with the Chinese economy in the meantime. A good test will be if we are able to increase our exports to China. But, right now, it’s too soon to count on CPEC for measurable returns.
Q: Is the Trump presidency, in your opinion, going to incorporate a marked change with regard to Pakistan, especially when it comes to funding?
SS: Fortunately or unfortunately, Pakistan is not a straight question for the US, regardless of who is president. But Trump will probably go by the I-scratch-your-back-you-scratch-mine dictum. In my opinion, the key to the regional riddle lies with Pakistan at the moment. Things can improve if the US withdraws from Afghanistan.
But, for that, Pakistan is the key. If the Americans realise that the road to Afghan peace runs through Pakistan, there is hope. Otherwise, the cycle of unending regional violence, that has thrived since 9/11, will continue.
Q: Not long ago – during PTI’s ’14 dharna, in fact – PML-N smartly took credit for the international Brent crude collapse by reducing prices at home. But now, with oil on the rebound, inflation is ticking up. That, invariably, will bring the deficit under pressure once again. What’s your take on this situation in the run up to the election?
SS: Definitely, when oil price jumps from $40-50 to $60-70 per barrel, there is going to be a pronounced impact on economies like Pakistan’s, which import as much as 80pc of their oil need. Locally, the impact will be very negative. For the ruling party, the timing could hardly have been worse. For a good couple of years soft oil demand, and hence soft supply, had kept a lid on oil demand and subsequently price. That meant that deficits of suffering third world economies like Pakistan’s were kept under check.
Now that scenario is changing. Oil is not just turning inflation. It’s also impacting the deficit, of course. The current account deficit, capital account deficit, the trade deficit, are all now slipping further into red.
If you will notice, the government has singularly failed in erecting wealth generating projects, which only betrays their divorce from modern economics reality. They made no dams, which could have improved agri-productivity and improved hydropower development, etc.
‘orphans: auto;text-align:start;widows: 1;-webkit-text-stroke-width: 0px; word-spacing:0px’>“The Nowregian Minister told me about an incident that occurred in 1958 when he was posted to Tehran, with concurrent accreditation to Karachi and New Delhi. He had been involved in the preparation for a visit to Pakistan and India by a Norwegian minister responsible for foreign economic relations when he was suddenly faced with an awkward situation resulting from the unexpected declaration of martial law in Pakistan. This infuriated the Norwegian minister, a dedicated socialist, who wished to register his protest by canceling his visit to Pakistan. It took all of ambassador’s powers of persuasion to convince the minister that he should keep to the original schedule. The Norwegian minister first visited Pakistan, where he was immediately received by Ayub Khan. The meeting took place in a modest conference room with flapping cotton curtains and noisy air conditioner. Ayub Khan was in uniform, with his sleeves rolled-up and with three civilian advisors seated beside him at the conference table. The discussion was focused and fruitful, conducted in a friendly manner with full participation of all those present, Ayub Khan never hesitated to seek or receive advice from his aides. The minister left Karachi in a pleasantly surprised mood, with most of the prejudice overcome.
In New Delhi the Norwegian minister was kept waiting for two days before they could meet the prime minister. Nehru received them in a splendid office, with raw silk curtains and silent air conditioner, and was seated all by himself at a large, polished conference table, with about ten of his aides sitting behind him at a considerable distance. The meeting lasted for about an hour, fifty minutes of which were spent by Nehru expounding on the evils of NATO and Norway’s membership thereof. As they emerged from the prime minister’s office and entered the imposing carpeted corridors, replete with guards and messengers, the bemused Norwegian minister asked the ambassador, can you tell me which one of these is a democracy and which one a dictatorship?”
The question has never really lost its relevance. Since 1969 to date we are oscillating between the two. It’s ZA Bhutto or Zia ul Haq or musical chairs of Benazir and Nawaz Sharif, it’s Parvez Musharaf or Zardari or again Nawaz Sharif; and the attitude remains dictatorial. And the poor public is still hanging between the slogans of democracy.
